Manufacturing sector weakens, according to latest CBI survey

The CBI’s latest Industrial Trends Survey showed a worsening in the manufacturing sector, with expectations for output growth weakening, orders falling at the fastest pace in three years, and investment plans being scaled back. However, the squeeze on UK households has eased marginally further, with pay growth picking up a little further and inflation falling back.

The CBI's latest Industrial Trends Survey showed that manufacturing output was steady in the three months to October, relative to the three months to September. However, output is expected to be flat over the coming quarter, marking the weakest growth expectations since December 2015.

In response to the survey, Rain Newton-Smith, CBI’s Chief Economist, described the findings as a sobering set of figures demanding immediate action at home and abroad. She went on to say that planned investment is being scaled back in the face of deepening Brexit uncertainty, so it’s vital that the Chancellor incentivises manufacturers to spend in areas that will help them become more productive.

Furthermore, new domestic and export orders fell at the fastest pace in three years, and optimism regarding the business situation and export prospects also deteriorated, with the latter falling at the fastest pace in six years. Manufacturers also expect to keep cutting back on capital expenditure on both tangible and intangible areas. Additionally, concerns that access to skills and labour were likely to restrict output and investment rose to the highest in almost forty years.

The latest labour market statistics showed that employment remained flat in the three months to August 2018, for the second consecutive rolling quarter. However, this was seemingly due to another sharp rise in inactivity, with unemployment continuing to fall (by 47,000 on the quarter, to 1.36 million).

Nominal regular pay growth (excluding bonuses and before adjusting for inflation) also edged up further, to 3.1% on the year (up by 0.2% on July). Real regular pay (excluding bonuses and adjusting for CPIH inflation) also picked up, to 0.7% on a year ago (on the less volatile three-month rolling basis), the seventh consecutive quarter of growth. Nevertheless, real pay growth remains weak relative to pre-crisis norms.

With such findings, it looks like there may be some further respite for real household earnings ahead, with CPI inflation falling in September – to 2.4%, compared with 2.7% in the year to August, a sharper fall than the consensus expectations (2.6%). The slowdown in inflation was driven by food prices and transport (particularly ferry prices), recreation and culture, and clothing – much of which reflected an unwinding of upside surprises to inflation in August. Partially offsetting upward pressures came from increases in electricity and gas prices. September’s reading contrasts with some of the stronger outturns seen in recent months, which have reflected movements in the more volatile components of inflation. Core CPI (which excludes food and fuel prices) also edged lower to 1.8% in September from 2.1% in August.